Tax policy and common sense, part two

Let’s continue with a discussion started last week. At that time, I described some of the fairness aspects of the tax reform currently winding through Congress. This week I look at some of the efficiency aspects.

Fairness, or equity, is something which we economists leave to theologians or elected officials. Fairness is how we divide up the economic pie. Economists are much more comfortable analyzing how we make the pie bigger and the economy more efficient.

In last week’s discussion, we recognized that the average wealthy individual will reap far more in savings from the proposed tax reform, by an order of magnitude or two, than the average middle class taxpayer. The argument is that the wealthy pay more in taxes, so tax reform should generate more savings to them.

Fairness aside, this doesn’t make sense in the creation of a strong economy.

Our economic system does best when we constantly churn the wealth through consumption. If Bill Gates received a $10 million tax break, I’m sure it wouldn’t affect his consumption one bit. I’m pretty confident he’s not for want to pay the rent.

On the other hand, even $1,000 more in the pockets of a middle class family will result in additional spending and economic activity.

There’s some merit to the idea that lower business tax rates attract more businesses back to the U.S., and hence generate more jobs and raise wages.

Most economists agree that we’re more competitive when our corporate tax rate is more in line with our competitors. Canada’s corporate tax rate hovers around 20 percent, and perhaps ours should too.

However, we should at the same time means-test the gigantic tax loopholes that only our wealthiest corporations can access. These loopholes were designed to bring tax rates of some very large corporations to about zero, even as the mom-and-pops across the country pay the full ride or a very high personal marginal tax.

What we really should preserve is the tax-deduction incentives to buy a modest home, to send our kids to college, and to deduct the high taxes that highly urbanized states impose on us. A higher personal exemption does none of these.

But, we could also means-test deductions by phasing them out for incomes beyond the top 5 percent.

This is common sense, is fair, won’t affect consumption, and could help fund lowered rates to bring businesses back. And that’s efficient.